Why A Line of Credit Is Good for Your Business

Updated: Mar 7



A line of credit can be good for businesses in all growth stages to accomplish many goals or take care of last minute needs as we will discuss in this article. As a business owner you will want to weigh all your financing options. So lets first take a look at what a line of credit actually is.


What Is A Business Line of Credit?


You might be asking yourself, what is a business line of credit? The term is much simpler than it may seem. A line of credit or LOC is not like a traditional loan that you may be familiar with. Instead of a lump sum with interest that you pay back over a set period of time, a line of credit can be drawn on, paid off and reused as many times as you need. Of course, you will have a set limit as to how much you can borrow. Typically, a LOC will be from $2,000 to $250,000 depending on your company's credit rating and the lending institution.


How Can A Line of Credit Be Good For Your Company?


There are many ways that a credit line can be good for your company. First, a LOC can help your company grow when used to purchase equipment and supplies. Other operational needs such as payroll, marketing campaigns, expansion, and repair of equipment. Second, most if not all companies need an emergency plan for capital or at least to have it available for unexpected expenses. The best time to qualify for a credit line is when you don't need it. Third, it can be used to build more business credit. You just have to make sure the lending institution reports to the business credit bureaus.


When Should I Take Out A Line of Credit?


If your company is growing faster than you expected, you may not have enough money on hand. This is a good time to start thinking about securing a credit line for business. This will allow you to pay your workers on time and fund your everyday operations. An expanding company simply can't grow if you don't have what you need to keep up with the demand. Also as we alluded to above to have a LOC accessible it gives the business owner peace of mind, knowing that any emergency can be covered.


How To Qualify For A Business LOC?


Most banks and other traditional lenders will require your company to have a high revenue stream coming in. They may require you to be in business for at least 2 years, require over 600 FICO, solid financials, and inspect your location, view your business bank account information, proof of ownership, business and personal tax returns and more before approving you for a line of credit. This can be very slow and frustrating for those that need the working capital quickly.

Luckily, there is an alternative to traditional lenders. There are many online lenders that are offering lines of credit with less strict requirements. For these online lenders, you will need to be in business for at least 6 months and have a $50,000 in gross annual revenue. While most online lenders vary on a minimum credit score requirement, you should have at least a score of 500 to be considered. Lenders like FundBox and Kabbage will request to link your bank account or accounting software for faster approvals which could be in minutes.

With these lower requirements often comes higher interest rates or fees on the money you receive. This option can still be well worth the cost as hundreds of thousands of business owners have used them but it depends on your situation or opportunity cost. These companies have approved billions of dollars each year for the last several years.


What About A Business Credit Card?


You may have heard that you can get a credit card for your business even without much business credit. A business credit card is a great option you can use to purchase any items or cover many expenses your company may need. Your personal credit score will need to be solid though. Lets look at a few differences between credit cards and a traditional LOC.

First, a business credit card might have a lower limit on how much you can borrow depending on your personal and company credit profile.

Second, rates and fees, where if you need cold hard cash, a business credit card will charge you a transaction fee plus interest accruing daily which could add up quickly. You may also be charged fees like an annual fee or late fees if you fail to make your monthly payment on time.

Business credit cards are somewhat easier to obtain than a line of credit which makes them perfect for those just starting out. There are business credit cards that offer 'No Interest' for an introductory period of time, typically 2-12 months.

As your company's revenue grows, you can always switch over to a traditional LOC. This is how many companies expand and grow from a tiny business into a major corporation.

In addition to easy access, business credit cards come with a few extra perks. Many of them offer cash back on purchases and other rewards. If you are spending a lot of money monthly, these rewards will quickly build up. This is a great way to save money while financing your daily operations.


Conclusion


Now that you know what a line of credit can do for your business, why not apply for one to either take advantage of an idea to expand that you have been putting off or just to be more secure in case of unexpected circumstances? We mentioned Fundbox and Kabbage but there are many companies offering credit lines that make the process of signing up a breeze.

So what are you waiting for? Go out and get the money your company needs today!

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